Still Elevated: Risk of Mexican Peso Move in 7 Days

Still Elevated: Risk of Mexican Peso Move in 7 Days

At Asymmetrica, we are continuing to monitor both the two bilateral NAFTA negotiations (US-Mexico and US-Canada) and the impact on forex risk. While the Canadian dollar remains calm, our Predata signals are revealing nervousness regarding the Mexican peso.

On September 1st, the activity around the underlying digital media that are correlated with FX moves on the Mexican peso spiked to 3.6 sigmas (standard deviations) from the mean: the highest in the past year.

September 4, 2018, the digital activity around the Mexican peso was ta 3.6 sigmas from the mean.

Although today the signal is down to 1.9 sigmas from the mean, we are betting the risk of a major FX market event in the next week is worth watching.

On September 1st, activity level dropped to 1.9 sigmas from the mean.

The thought leader who is most strongly correlated to peso FX moves has been expressing concerns about: when and how a renegotiated NAFTA will be signed, and strained relations with Canada as it accuses Mexico of “betrayal” in bilateral negotiations; but has been positive on the US PMI (purchasing managers index) for US manufacturing, as well as on revelations from Bob Woodward’s upcoming book that administration sees trade deals as key to national security, including the deal with Mexico.

That hasn’t stopped people going to look up the history of the 1994 Mexican Peso Crisis (aka, the Tequila Crisis) in higher numbers than normal.

Clearly the FX market is nervous and trying to read the tea leaves — or in the words of Bloomberg’s economist in Mexico, “awaiting the white smoke from DC on NAFTA.”

In short, if you’re spending money hedging against other FX risk exposure, you might want to shift some of those costs to hedging on the Mexican peso.

Dr. Vanessa Neumann is the president and founder of Asymmetrica, a risk advisory firm, with a specialty in Latin America. She is also the author of “Blood Profits: How American Consumers Unwittingly Fund Terrorists,” published by St. Martin’s Pres in December 2017. The Brazilian edition will be out in late November 2018.